A blog about economics, finance, business and corporate governance. My background is in economics, with degrees from Columbia and Johns Hopkins. A career in international development, equity capital markets and as a corporate finance chief and board member lead me to think about events in a different way--hence the blog's name.

Tuesday, March 25, 2014

Exxon's Solid 2013 Positions It Well for The Near-Term Future

Mutual fund investors who managed to avoid the global, integrated oil companies in the fourth quarter did well, and those who bought oil field services companies improved their performance relative to benchmarks. But, as prosaic and unloved as these companies (Exxon Mobil, Chevron, Shell, Total, and BP) are, they will be important to global development and to portfolios in the future.

Value oriented investors tended to take positions in Chevron, which has awakened to the importance of returns on capital for growth and portfolio management in the future. If their returns improve, their stock should do well, since it is relatively cheaper than Exxon.

Exxon's 2013 after-tax earnings from Upstream activities were $26,841 million, down about $3 billion from 2012. This decline was driven by foreign operations with after-tax earnings of $22,650 million, down $3 billion from 2012. U.S. operations had a good year. Higher gas realizations ($4.60/kcf vs.$3.90/kcf worldwide) were offset by lower realizations on petroleum liquids; the net increment to earnings was $390 million. Adjusted production was flat.

Upstream activities generated a return on average capital employed of 17.5%, with average capital employed at $152,969 million and capital expenditures of $38,321 million. The portfolio mix of projects coming on stream around the world (six major projects including the Kearl Athabasca tar sands project in Canada) is well balanced from fuels, geography, and technology viewpoints.

Chemicals had 2013 after-tax earnings of $3,828 million, and a ROACE of 18.5%; the capital base was $20,665 million and capital expenditures were $1,832 million. The bulk of chemical earnings, $2,755 million, came from U.S. operations, and this is where continuing opportunities for volume growth and profit improvements exist out to 2018 in the current plans.

Exxon is the largest chemical and natural gas producer in the United States.

Downstream operations, including retail gasoline operations, generated after-tax earnings of $3,449 million, with an ROACE of 14.1%. U.S. operations generated earnings of $2,199 million in 2013. Overall, Exxon's returns on capital continue to be superior to its four peers listed above, no matter what the macroeconomic environment.

Over the next five years, the company expects oil-equivalent production from North America to grow from 32% of production currently to 35%. Over the same period, LNG production is expected to increase to 55% of production on an oil-equivalent basis from 45% today. Both of these mix shifts should be positive.

Exxon's $19 billion LNG project in Papua New Guinea is slated to load its first cargo in 2014. This 6.9 million metric ton per annum project is extremely complex from the engineering, logistical and environmental management standpoints. PNG is a difficult environment in which to get projects done, as they dithered for years on a seabed mining project, putting it though endless hoops that, along with a global recession, eventually put the project in a deep freeze.

This project's output will be primarily for export,and so it should be a great laboratory for our domestic cries to export LNG from the U.S. Exxon's project, in which it has a 33% operating stake, includes 253 miles of subsea pipelines connecting eight gas fields, with a gas conditioning plant and the liquefaction plant. One of the real moats that Exxon has around its business is the depth and scale of engineering, procurement and project management expertise that permits it to work in all kinds of challenging physical environments.

Regulatory and compliance expense for all the global majors has been increasing much faster than revenue or profit volumes. It is good to see the company organizing itself into nine or more cross-organizational teams to deal with global issues like Risk Assessment and Management and Incident Investigation and Analysis. This seems like a way of organizing that makes sense for the business, as opposed to checking a box required by incoherent legislation.

Despite having a robust capital spending plan and returning $25.9 billion to shareholders (the stock has a 2.6% dividend yield even after the run-up), Exxon filed a $5.5 billion shelf for a multi-part debt offering, with a AAA rating from both Moody's and from Standard and Poor's. Proceeds will be for capital spending, acquisitions, and for refinancing of commercial paper.

A strong balance sheet along with disciplined capital utilization is a good tonic for shareholders.